China stocks extend rise, sign of market stabilisation

China stocks rebounded for the second day on Tuesday, in a further sign of improving investor sentiment that may help the market gradually stabilise after the rout since mid-June. The CSI300 index of the largest listed companies in Shanghai and Shenzhen rose 0.9 percent, to 3,339.03, while the Shanghai Composite Index gained 0.9 percent, to 3,185.62 points.
China's volatility index, a gauge of investor fears, has dropped to 40 percent from an August peak of 64 percent.
But some analysts warn that the rebound could be temporary as valuations of small stocks are still high, and the Chinese economy has yet to find its feet.
China's President Xi Jinping told the Wall Street Journal in an interview that developing capital markets was a key goal of China's reforms, which will not change just because of current market volatility.
Most sectors ended the day higher but the CSI300 Infrastructure Index was down 0.1 percent.
Small caps reversed the losses in morning trade with Shenzhen's start-up board ChiNext gaining 0.2 percent at the close.
Brokerage shares, including CITIC Securities and Haitong Securities, jumped as investors bet securities firms would benefit from a possible market link-up between Shanghai and London as suggested by UK finance minister George Osborne in Shanghai on Tuesday.
Some analysts warn that with valuations of small stocks still high, and the Chinese economy yet to find its feet, the rebound could be temporary.
"Remember we're still in a bear market," said Chang Chengwei, index futures analyst at brokerage Hengtai Futures.
"What we're seeing is just a technical rebound," he said, adding that the US decision to hold rates unchanged, and Beijing's recent market-soothing messages had created a "window of opportunity".
But investors are nervously looking to China's flash factory activity survey on Wednesday for clues on whether the economy is deteriorating more rapidly than earlier thought.
"We continue to give a low rating to the market, holding a relatively bearish view on price trends," said Wei Fengchun, strategist at Bosera Asset Management, citing a big reduction in outstanding margin loans last week, and signs of investors fleeing the market.
Blue chips rebounded on Wednesday morning, led by banking shares, as some investors think the sector - trading at 6.3 times earnings on average - is already cheap.